Trickle of foreign money being traded in China

ByJanet Ragatz, Special to The Christian Science MonitorAugust 31, 1981

Wuhan, China
— China's modernization effort is making changes in the country's approach to international currency. The changes began in 1979 with the creation of special currency certificates for foreigners and have led -- almost -- to the establishment of a foreign-currency market.

Normally, in a socialist society, all foreign moneys pass to the government. It is unusual to have foreign exchange on sale. But today, a Chinese corporation can buy currency with the assistance of the Bank of China.

As part of its modernization effort, the government has been offering incentives to workers in industry, to farmers, and to factories. For factories, the incentive was letting them keep part of their exchange earnings -- only about 10 percent -- but nothing was permitted before. The idea is to make factories responsible for their own profits and losses. They are expected to use their 10 percent for any foreign-exchange needs, and what they don't use, they must sell -- at a profit, of course.

For some time, the People's Republic of China has had a quota system for distributing foreign exchange that collected in the government pot. Access to this pot was established by a priority list. Industries with import needs authorized by the state plan had no problem getting exchange. Others did; they might meet the quota, but nonessentials were low-priority items. The well might run dry before they could lower the bucket.

This quota system still functions. Those high on the list continue to get funds from the government, paying the regular rate of exchange. Now, those farther down the list can make a choice: wait their turn for regular funds, possibly upsetting their production schedule, or buy exchange on the new market, where it will cost a bit more.

When the seller decides to part with a portion of his 10 percent, he sets the price for the deal. The Bank of China acts as broker, finding a buyer and collecting from each party a quarter of a percent fee. The bank does not buy or sell exchange on its own.

There are several restraints on this market: first, the need to come under the quota system; second, the willingness to pay a premium for funds; third, of course, available renminbi (the people's currency, also known as RMB) to convert.

The official domestic exchange rate, beginning in 1981, became 2.8 to the US dollar, rising from 1.5. This was designed to encourage exports and discourage imports, and is what the high-priority importer will pay. On the new market, the price has risen above 3.0, fluctuating according to demand.

This leaves China with three rates: the 2.8, the 3.0 and up, and the rate for tourists and foreign residents eligible to convert renminbi. A American tourist receives 1.63 to his dollar and the foreigner converts at the same rate. Last summer the rate was 1.46. It is better for the person coming in, less desirable if someone is sending dollars out. But then, not everyone can convert money.

These new developments augment changes made in 1979 which introduced foreign-currency certificates. When foreigners convert their money, they receive these certificates. Chinese receiving foreign currency from relatives abroad also get these certificates. They are on a par with RMB, but foreigners, at least, are not expected to use that currency.

Those legally entitled to do so, because they are paid in RMB, may be asked to show a booklet authorizing them to use the people's money. This does not usually happen in ordinary stores and restaurants, but it frequently happens in hotels, major restaurants, stores, and curio shops that tourists frequent.

Theoretically the foreign-exchange certificates are accepted anywhere, but off the beaten tourist path they may not be. Boatwomen in a central Chinese park refused them, asking for "real" money.

On the other hand, people learn rapidly. Young Chinese clustered around the woman sailors trying to explain that this was very good money indeed. It commanded special goodies not available outside the Friendship Stores where foreigners are encouraged to stop.